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Safe Place For Your Retirement Nest Egg


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When the stock market goes up one day, and then goes down for the next five, then up again, and then down again, that’s what you call stock market volatility. In layman’s terms, volatility is like car insurance premiums that go up along with the likelihood of risky situations, such as if you have a poor driving record or if you keep the car in a high-theft area.

Market volatility makes it hard for people in the real economy to plan ahead. There are some concerns about how the U.S. economy will fare now that the Fed is no longer going to be adding billions of dollars in liquidity to the markets every month through the purchase of Treasury bonds and mortgage-backed securities. So the Fed’s next challenge will be to figure out how to raise interest rates gradually so it does not jeopardize the economic recovery — or freak out the financial markets.

Recent market swings have many retirees and pre-retirees seeking safe places to put away what’s left of their nest egg. Because double-digit losses can take a serious toll on retirees’ assets, the financial security many people anticipated enjoying in retirement may be compromised.

Unfortunately, because of this weeks recent economic turbulence, most equity-based investments have experienced a significant drop in value. For most investors, market volatility is a fact of life. Stock prices fluctuate from day to day, and markets ebb and flow over time along with the economy and business cycle.

Those saving for long-term goals can usually overlook temporary volatility in the interest of long-term gain. But for retirees, who increasingly rely on their investments to fund their living costs, market volatility can mean the difference between living comfortably and just scraping by.

In fact, retirees are particularly vulnerable to market downturns, especially in the early years of retirement, because of their dependence on portfolio income, their limited investment horizon, and their need to make sure their savings last throughout their retirement.

Positive returns early on can mean a lifetime of financial comfort, while early losses can mean running out of money in the midst of retirement. Unfortunately, the timing of market losses and gains is something that we cannot control.

During the great depression a few years ago, many investors lost a significant portion of their retirement savings. Those who were unlucky enough to be on the brink of retirement — or worse, those who were recently retired — found themselves making radical adjustments to their retirement plans in order to get by.

As a result, many retirees are looking for the safety net provided by annuities.  No matter how the financial markets perform in the coming years, a retiree can have peace of mind from knowing his/her lifestyle is financially secure because of the income provided by a Guaranteed Lifetime Income Annuity.  In addition, since the payout is guaranteed, a retirees’ retirement income is safe from future stock market swings and can never be exhausted.

When investors research current annuities today, what they are likely to find is that there are a large number of optional features that are now available as additional features on the annuity product. These options, often referred to as riders, allow annuity holders to access some additional benefits that are not offered within the main annuity product.

The riders are usually known as Lifetime Income Benefit Riders. These riders can be added to a Fixed Indexed Annuity for a small annual cost of approximately 0.45% of your Contract Value.  An income rider is an optional add-on income benefit for a fixed indexed annuity that (once started) provides a guaranteed lifetime income stream…even if your account balance falls to zero.

And you earn an enhanced rate each year you don’t take any distributions and defer commencement of the guaranteed lifetime income benefit. This enhanced rate is most often called the ‘roll-up rate’. Roll-up rates can range from 5% to 8% per year for a compound accumulation, or 10% per year for a simple accumulation. These roll-up rates only apply to a separate and hypothetical income account value.

The income account value is not real money. You can’t access it, and it only exists until such time as you terminate the annuity or rider, or start your lifetime income benefit. With deferred annuities like indexed annuities that have income riders attached to the policy, the accumulation value and rider value are typically a separate calculation. The difference between the two is that the income rider calculation can only be used for income.

You can’t peel off the interest, transfer that amount, or get to the total in a lump sum. An easy way to remember how this works is to draw a line down the middle of a blank sheet of paper. The left hand side of the ledger is the accumulation value. This would be the index option value for indexed annuities. The right hand side of the ledger is the income rider calculation that is for income only. Two separate calculations with two separate contractual rules.

Fluctuations in the market may cause your asset mix to become too heavy in stocks — which could expose your retirement nest egg to damaging, even irreversible, setbacks when you are on the verge of retirement.  Although market volatility is a normal part of investing, it can pose serious challenges to investors, especially those entering or already in retirement. Market declines in the early years of retirement can dramatically increase the probability of running out of money in later years. Income riders do have their place when planning for future income or what I call “income later.”

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Wednesday, December 17th, 2014 Wealth Management Comments Off

A Retirement Shield Safety Net

Retirement investing today isn’t the way it used to be–at least the way it used to be in the near past. Let me ask a very simple question. When you predict the future are you right more often than when you analyze the way things are today?

With the market becoming increasingly more volatile who can predict where it’s going to go?  Shockwaves from collapsing oil prices continued to reverberate through markets Tuesday, hitting stocks and currencies closely linked to commodity prices.

In fact, this market has become pure lunacy. It would make more sense for the S&P 500 futures to go higher as price down, not lower.  It’s just funny how convoluted and upside down we can get things sometimes. If you have been viewing this as oil prices are coming down, more money in the consumer’s pockets around the world… this is a good phenomenon.

You have to be beyond stupid to wonder how something that puts so much money into peoples’ pockets could take so many stocks down with it when it occurs.  Investors will have to wait until stocks are so low that they are no longer impacted, and then the sanity will return.

I don’t know about you, but I’m certainly right more times when I take a shot at the way I see things now as opposed to the way I think they should be. When investing your retirement funds isn’t it better to have more accurate trades than guessing which stock SHOULD be going up, or IF the market SHOULD go up tomorrow?

One of biggest mistakes individual investors make is that they invest based on what they think should be happening versus what is. For instance, based on what is currently going on in Europe, few can understand why the stock market in the U.S. is going up.  Investing can sometimes feel like gambling at a Las Vegas Casino. You buy the hot fund, it goes up, then crashes down, causing you to lose money.

Many of you have learned to trade based on hopes and expectations, the way we think things should act in the future. It might be a stock that SHOULD be going up based on someone’s interpretation that the value of that company is far greater than the current stock price. Or maybe we think that the company has some technology that might be the answer to cancer, or some other great breakthrough.

Investing based on what you think will happen in the future puts you “at risk”.

The 24-hour news channels are great at coming up with simplified conclusions that explain why the market went up or down on any given day, but the truth is there’s no way to know for sure. Financial markets are very complex. They are globally integrated. There are times they may trade on fundamentals and days when it is all based on what is going on globally.

An indexed annuity investments are designed to mirror the performance of a financial index, such as the S&P 500. Investors can chose how closely their annuity follows the index’s performance, by selecting a participation rate for the annuity.

The value of your annuity will rise and fall according to the movements in the market. What makes the S&P 500 index s unique is that it doesn’t presume to have greater wisdom than the collective market, but instead tries to channel the markets’ wisdom to your advantage.

Contrast that to the many mutual, hedge and other types of actively managed funds which are run by money managers, whose sole aim is to beat the general market’s yearly performance. They do so by buying and selling individual stocks or other investments in their own unique combinations they decide upon.  What you don’t hear about is that nearly all fund managers will fail horribly at consistently beating the market.

The reason why we save money to use when we retire is simply to maintain our financial independence when we cannot work anymore. When we have money saved for our retirement, we do not have to depend on others to support us and help us meet our needs. When we get an annuity, we assure ourselves that we will have something to live on for as long as we need it. A true safety net for retirees.

With an index annuity, the interest rate fluctuates depending on the index it is linked to. An index annuity may not guarantee you the kind of returns that you could get by trading in the stock market. But then again, it shields you from the volatile nature of the stock market which has destroyed many a people’s lives because of its uncertainties.

Another concern is being able to lock in interest credits. You had success in the market in the past years, however, you don’t want to go backwards due to a market downturn.  However, the insurance company guarantees you a minimum rate of interest and has a no loss provision, thereby eliminating the risk of the stock market.

The annuity will usually track the index in a bull market; however, the issuers of the annuity also guarantee a minimum annual interest rate to avoid losses when the index is in a downturn.  The basic insurance feature embedded into annuities offers a measure of protection for investors against market downturns.

A popular kind of index that the annuities are linked to by most insurance companies is S & P 500. The rate of interest payable to the customer is calculated by taking into account the value of the concerned index on a day to day basis.

The fixed index annuity (FIA) allows for multiple options to accumulate retirement money – then offers a couple more ways to access that money to spend. New benefits focus on protecting your principle, while allowing for higher interest credits than traditional fixed annuities.

Think of this process as two phases working at the same time. The ‘collection’ phase and the ‘payout’ phase. During the collection phase, your principal deposit earns either a fixed rate or an indexed rate. The rates are reset every 12 months and guaranteed for one year.

You need two Guarantees for your retirement income. Your monthly income checks must stay the same every month never decreasing, when interest rates decline. Your monthly income check must keep coming to you for your entire life, no matter how long you live. Most financial vehicles you have looked at, or have money in, cannot give you these guarantees.

Only annuities can guarantee your monthly income check, could be the same every month depending on the settlement or income option selected. Your income cannot decrease if interest rates fall. Your monthly income check keeps coming to you as long as you live.

Your annuity income cannot run out. Also, if you die prematurely, your annuity can be guaranteed to continue at the same monthly amount to a named beneficiary if a specified period is chosen.  If you want an investment that can offer you safety of premium, flexibility, tax advantage, accessibility when you need it and a chance to have a lifetime income, an indexed annuity can provide that service.

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Tuesday, December 16th, 2014 Wealth Management Comments Off

Safe Way Protect Retirement

If you are on the road to retirement land it could be like a road trip without a destination in mind.  As the great sage Yogi Berra once said:  “If you don’t know where you are going, you might wind up someplace else.”  With the 2008 global financial crisis still fresh on everybody’s mind and interest rates reaching an all-time low, people are more attracted than ever to the message of safe ways to successfully build wealth.

Pre and post retirees are looking to become safer with their money while at the same time, have their money earn competitive interest, and to prevent future losses from the stock market.  The question is: How to protect their principal, retain their gains, and assure themselves a paycheck for life?

Today, 401(k) accounts – are the dominant savings vehicle in the private sector.  In contrast to pensions, in which a group’s assets are pooled together and professionally managed, a 401(k) is a sole account, and the employee, by and large, chooses what to invest in.

A 401(k) has also suited employers, who have been able to hoist all the risk for meeting retirement needs off their books and onto yours. Generally, in a pension (also known as a defined benefit, or DB, plan), your employer guarantees you a certain benefit when you retire, to be paid until you die.  With a 401(k) (or defined contribution, or DC, plan), you are guaranteed only as much money as you have managed to invest, plus the return that investment has generated.

First of all it is important to note, employees aren’t going to reach an adequate retirement income by relying on the typical 3 percent-of-pay contribution that employers kick into 401(k)s.  Secondly, the rise and fall of stock prices has very little to do with the average American and their participation in the domestic economy. Interest rates, however, are an entirely different matter.

Interest rates are not just a function of the investment market, but rather the level of “demand” for capital in the economy. When the economy is expanding organically, the demand for capital rises as businesses expand production to meet rising demand. Increased production leads to higher wages which in turn fosters more aggregate demand.

However, in the current economic environment this is not the case. The need for capital remains low, outside of what is needed to absorb incremental demand increases caused by population growth, as demand remains weak.

Currently, the U.S. is no longer the manufacturing powerhouse it once was and globalization has sent jobs to the cheapest sources of labor. Technological advances continue to reduce the need for human labor and suppress wages as productivity increases.

Today, the number of workers between the ages of 16 and 54 is at the lowest level relative to that age group since 1976. This is a structural problem that continues to drag on economic growth as nearly 1/4th of the American population is now dependent on some form of governmental assistance.

While there is not much downside left for interest rates to fall in the current environment, there is also not a tremendous amount of room for increases. Since interest rates affects “payments,” increases in rates quickly have negative impacts on consumption, housing and investment.

As a result, people feel a need to hold on to wealth to deal with uncertainty about future spending needs. The problem is that it comes at a real cost in terms of foregone consumption.  In fact, retirees with median wealth have what’s called a “consumption gap” of about 8% on average — a gap between what they are spending and what they could spend.  Retirees are withdrawing money from their retirement accounts at a very slow rate or not at all.

The reasons for the consumption gap phenomenon: The complexity of what researchers call “decumulation” decisions, uncertain longevity and uncertain medical and long-term costs. This means they are trying to make their other accumulated assets last as long as possible to ensure an affordable quality of life in retirement.

If people could be convinced to buy long-term care insurance, and secure enough guaranteed lifetime income in the form of optimized Social Security, pensions (if any), and purchasing single premium immediate annuities (SPIAs) so that they would have enough income to cover basic living expenses, they would feel much more secure about spending money in retirement.

If there is a gap between guaranteed income sources and basic spending levels, the most efficient way to fill that gap is with a life annuity, a type of insurance product that would provide income for life. To make this work, retirees would purchase with a portion of their nest egg a life annuity that would provide enough income to bridge the gap.

Knowing how much you can safely withdraw from your retirement accounts ought to give some comfort too. The long-standing rule of thumb is that you could withdraw 4% per year from your retirement account without having to worry about running out of money. The widely-debated “4% rule” has been a standard retirement spending benchmark since first introduced in the mid-1990s. However, with high stock market valuations and low interest rates, the actual percent that retirees can withdraw might be lower.

Yet the 4% rule doesn’t take the duel impact of Social Security and taxes into account. How accurate can it therefore be?  Moreover, the truth of the matter is that your safe withdrawal rate is quite personal.  The actual number depends on portfolio return expectations, remaining life expectancy, and the current balance of that nest egg.

With concerns over inflation and making sure that investments will meet our future needs, many people have turned to the fixed market for higher returns. It makes sense when you consider how well the S&P 500 index has performed historically.

A fixed-indexed annuity, or FIA for short, is an annuity that earns interest that is linked to a stock or other equity index. One of the most commonly used indices is the Standard & Poor’s 500 Composite Stock Price Index (the S&P 500).

The first and possibly most attractive provision of a fixed-indexed annuity is the no-loss provision. This means that once a premium payment has been made or interest has been credited to the account, the account value will never decrease below that amount. This provides safety against the volatility of the S&P 500.

FIAs offer consumers what could be described as the best of both worlds: a market-driven investment with potentially attractive returns, plus a guaranteed minimum return. In short: You get less upside but much less downside.

Indexed annuities work to help ensure a more financially secure retirement for pre and post retirees through guaranteed income for life, achieved with annuity products and tax-advantaged strategies that garner the potential for gains with no downside exposure to the stock market.

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Sunday, December 14th, 2014 Wealth Management Comments Off

Secure Retirees’ Lifestyle

The baby boomer generation has begun to retire and they don’t see retirement as a withdrawal from activity but a new adventure to pursue. The happiest retirees are provided with a roadmap for success, which is especially instructive for those who are close to embarking on the journey.

Retirees and pre-retirees tells us that retirement can be and should be an extraordinarily happy time in our lives as long as we start to strengthen our emotional bonds and exercise financial planning discipline well before we plan to retire.

With all the changes to technology and health care, people are living longer, healthier, more active lives and making different decisions about what to do during their “retirement” years. The biggest lesson for retirement success: plan as soon as possible for both your emotional and financial well-being, as you are likely to retire sooner than planned.

The reason, there’s not a single bank that’s going to allow you to take out a loan to fund your retirement.  With corporate pensions becoming a thing of the past, and many believing that Social Security won’t provide even a foundation of retirement income, it’s now up to the individual to save for their retirement.  When you stop earning a paycheck in retirement you need to replace that salary with spendable income.

It’s a safe bet that no one told you anything about what happens once your employment income hits zero and you begin to fund your own retirement. In fact, when you come to think about it, the entire world of financial advice — including the limits of many financial advisors’ knowledge — seems to be about how to save and invest.

The accumulation professional was there to help you accumulate retirement assets, but may not be specialized in turning those assets into a guaranteed retirement income stream. Retirees need to commit some retirement assets for future income needs to ensure a retirement paycheck. They also need to allocate assets to investments in order to stave off inflationary concerns, and they should consider alternatives that eliminate the risk of taking a loss in a down market.

Knowing that the markets are volatile, when it comes to mutual funds, it’s really not important how much the mutual fund gained — it’s how much you get to keep over the long term. If you want to keep those gains and not give them back to the volatile market, it’s important for people to find ways to take some of the risk chips off the table, but in doing so you’re going to need to find safer places which often times means watering down your returns.

What many people still don’t know is that there is an alternative asset class that keeps pace with the ups of the market but avoids all the downs. It accomplishes this without needing a money manager and hits the efficient frontier with the right risk to reward tradeoff. We find that for many boomers pooling their longevity risk may be the only way to salvage their retirement dreams.

For those who feel they did not save enough, or for those who want to be more efficient with their retirement assets, Guarantee Lifetime Income (other than a pension or Social Security) is worth a look. By pooling your retirement longevity risk with others in the same boat, retirees can have a higher spendable income than they could without risk pooling.

That means retirees can take more income from the same assets, with zero chance of running out of a retirement paycheck.  Unfortunately this isn’t a do-it-yourself retirement strategy because to efficiently accomplish risk pooling you need to know exactly when you’re going to die. Since you can’t predict the date upon which you’ll pass, retirees cannot optimally budget for the most retirement income, regardless of investment performance.

The companies best suited to evaluate and hedge against the retirement longevity risk are insurance companies offering annuities. Insurance companies that offer fixed income annuities provide the guaranteed income stream that allows clients to cover their monthly living and discretionary expenses.

Taking a piece of your retirement assets and turning it into a guaranteed, predictable retirement income stream allows baby boomers to comfortably enjoy their retirement without worrying if they’ll have enough money, regardless of stock market performance.

Knowing that you have a guaranteed income in retirement for the rest of your life, regardless of how long you live, is the equivalent of creating your own pension and knowing your retirement is secure is very comforting.

People today are looking for stability, and annuities are arguably one of the best ways to secure a retirees’retirement lifestyles. What’s more, there’s an annuity to suit the varying needs of almost all of our clients. That’s because from the most basic fixed annuities to equity-indexed annuities, no matter where the product lies on the risk spectrum, every annuity out there shares one powerful element — they all come with certain fundamental guarantees.

Annuities are a common investment vehicle for retirees seeking insurance for outliving their assets. They are used primarily to provide peace of mind through a consistent and steady stream of income. Annuities are considered an effective way to mitigate longevity risk.

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Friday, December 12th, 2014 Wealth Management Comments Off

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